HelloFresh SE (HFG) Earnings Call Transcript & Summary

Good morning, and a warm welcome to the HelloFresh SE Q2 2023 Results. [Operator Instructions] Let me now turn the floor over to your host, Dominik Richter.

Good morning. Welcome all to our Q2 2023 earnings presentation. Today, I would like to confirm the numbers that we've already pre-released a couple of weeks ago and use the opportunity to shed some additional light on how Q2 turned out for us, but also how we see ourselves performing against our long-term ambitions. Our mission is to change the way people eat forever. And home cooking has obviously been over hundreds of years and will most likely continue to be the most popular way to eat dinner for the next 100 years. More than 50% of dinners in our target markets are cooked and consumed at home, a figure that's also incredibly sticky throughout economic cycles in all ways of life. In the almost 12 years since HelloFresh was started, we grew HelloFresh to a meal's run rate of over 1 billion meals per year, which is, on the one hand, an incredible achievement; on the other hand, this also just constitutes a little over 1% of all dinners that our prime target group consumes. We've more recently disrupted another food category successfully and grown into the largest direct-to-consumer ready-to-eat player in the U.S. The plan is to also bring that to Europe and other places around the world, changing the way people eat forever, not only for people cooking at home, but also for those being a little bit shorter on time. These 2 scaled verticals and a number of newer verticals, which are in their early stages, and as a meaningful step closer to our vision to grow into the world's leading food solutions group. And while we have achieved some amazing wins, and despite being the biggest disruptors in these 2 huge consumer categories of home cooking and ready-to-eat in the last decade, we still feel very early in our trajectory and are excited about the days ahead of us. And while it's always nicer to have everything go smoothly up into the right in an extremely consistent fashion, the reality is that it's usually a little bit more messy, and we continue to be faced with many things that we cannot control, whether that's a pandemic, which in hindsight was a big accelerator to our market penetration, and inflationary shock or war mongering, just to name a few. Others such as capacity constraints are, to a certain degree, in our own control, but we cannot always time them without any impact to our growth journey or actually in line with a financial quarter, making the numbers sometimes seem a little bit more volatile than they are if you assume where they should be headed in the mid and long term. In the long term, these are all completely negligible things if you think about the size of the opportunity that we go after, but in the short term, they often cause us a lot of hard work and long nights. What we have done in all these phases is to really focus on the long term and work backwards to actually understand what the best strategy is to deal with the shorter-term opportunities and challenges of today. And so for the first half of 2023, for us, this really meant shifting our focus to exercising strong cost discipline across the board and improving our underlying unit economics significantly, while also making our customer experience better. This puts us now in a position to take the next step in our growth journey with a more profitable model and a lot more moats against current and potential future competitors. After the massive scale-up over the last 3 years, when we more than tripled the business, these past months have certainly felt a little bit more like a transition period, but it has been healthy and made us the strongest version of HelloFresh that we win. In terms of talent, technology, but also our unit economics, I think will pave the way for strong profitable growth and predictable sustainable free cash flow generation. In the end, it's quite simple. As a company, we strive to maximize the long-term free cash flow per share for our shareholders. We're building the customer base, technology, talent and brands to become a category-defining company in our own right. With the many moats and the strong market share gains that we have achieved, we are on a clear path to build a lasting winner in one of the largest consumer categories and also on track for very material free cash flow generation. With these opening remarks in mind, I'd like to walk you through some of the highlights, specifically of Q2, bearing in mind the overall H1 development. First of all, we've grown constant currency by about 1% year-over-year as a decrease in active customers is more than offset by an increase in AOV of 8% and continued strong average order rates close to record levels of 4.1 orders per customer per quarter. We've seen very strong operational efficiencies on both procurement and fulfilment expenses, which drove a very substantial contribution margin uplift by about 3 points to 28.4% contribution margin. That is very reminiscent of some of the contribution margin that we've actually seen pre-COVID or in the early days of COVID. We've had a very disciplined spend approach against a relatively soft consumer environment, which translates into broadly flat relative marketing expenses and which also gives us some additional discretionary growth budget for the second half of the year. Most notably, we achieved our highest ever quarterly adjusted AEBITDA of EUR 192 million. That's a margin of about 10%. Importantly, we also generated very significant free cash flow again. Our free cash flow from operation is among the highest it's ever been in Q2. And so also Q2 and Q1 combined made us to achieve not only record operational free cash flow, but also return to generating free cash flow after the investments that we've taken in fulfilment centers and the build-out of our infrastructure. We've narrowed our top line guidance to 2% to 8% of constant currency growth, and we've upped the range of adjusted AEBITDA. We expect to land to EUR 470 million to EUR 540 million, taking into account the additional discretionary growth budget that we've taken aside for H2. Why do we think -- or why are we positive for the development in H2? Number one, because we've worked hard on actually improving our unit economics and can go for very profitable growth in the second half of the year. Our Factor production capacity will be debottlenecked. The comparative period benchmarks and a number of product enhancements, such as the increase from 35 to 45 meals on the menu in the U.S. market will start to hit. This, in combination with our better contribution margin, will guide us the way to continued profitable growth and then also free cash flow generation. In addition to improving our unit economics in the short term, we also continued to invest in new business verticals such as pet food for our Factor Europe launch, and a number of capabilities in the first half of the year to drive mid- to long-term growth, profitability, and ultimately, free cash flow per share. For the last 6 years, we've been investing into establishing artificial intelligence and machine learning as key components of our technology platforms with many use cases live and providing real monetary benefit. Right now, we have a group of about 70 data scientists and machine learning engineers who work exclusively on training, refining and deploying around 1,500 models per week across a multitude of different use cases all along the HelloFresh value chain. Most of our models are powered by the unique and proprietary data sets that we've accumulated over the last few years such as customer order patterns, meal preferences, menu browsing behavior, and other rich customer preference training sets. Examples of AI/ML-driven applications that are used daily in our operations include, for example, menu creation algorithms, new real-term customer lifetime modeling, incentive individualization, customer service automation, or the load balancing of picks along our picking lines in near real term. When most of these scaled use cases rest on predictive AI, we also continue to be excited about our forays into generative AI as well. For both types, the value of our own proprietary data sets is immense. For both types, the infrastructure demands to structure your own data, to store your data, compute, to make it consumable for the different application cases for very similar principles, that we have gained strong experience in over the past 6 years. Outside of the AI/ML use cases that we already have live today and that I just shared, we see lots of opportunity across all P&L line items to benefit from the advances of AI and specifically gen AI. Over the last 6 months, we started experimenting with some use cases. We've become increasingly excited for their mid-term potential. I don't want to read out each and every one here, but if you focus on some of the ones that we have in green here, those are ones that we're experimenting live with today already. And so if I pick out one example from each of the G&A line items, for example, on the revenue side, we've seen good initial results to better leverage AI to understand fraudulent customer behavior and better crack down on it, actually identify that earlier and be more efficient in turning these customers away. In procurement and fulfilment, we've started to leverage computer vision to enhance the quality of our picking processes, and we aim to introduce more widely for quality control purposes around our fulfilment centers around the world. In marketing, for example, we've seen tremendous opportunities for creative asset generation such as simple copywriting, image generation or video generation, something that is done at the moment by many, many talented people inside of HelloFresh ad agencies today at varying quality levels and where generative AI can play a big role in the midterm. It's also, I think, a really interesting use case to leverage realtime weather data and forecast to dynamically adjust and configure our packaging solutions which allow us to reduce packaging, which benefits the environment and helps us save on cost, plus provides a better user experience to customer. And then finally, with regards to employee productivity and G&A, I think especially with regard to our engineering population, we're establishing code assistance tooling to make the coding process less error prone, of higher quality, and achieve higher productivity in the process. So ultimately, in the mid to long term, a lot of these opportunities will eventually materialize and make us a better and more efficient business. It's hard to say what time line we're exactly looking at to bring many of these opportunities into production, so into their daily usage versus simply test cases where we've already seen good results. But given our repeat experiences, given our talent and the investments that we've done over the last 6 years into structuring, cataloging and storing our own proprietary data sets, we feel pretty well equipped to leverage the opportunities that are provided by this new technology. Let me return quickly to some of the numbers from the second quarter. So first, starting with meals, we delivered around 254 million meals in the second quarter of 2023. So after the unparalleled growth over the last 3 years, that's actually been the first year where we've been down in meals, about 6% versus last year as we wrote off the pandemic comparable quarter, but we remain well on track to deliver more than 1 billion meals to our customers in 2023. While existing customers continued to show strong stickiness and actually ordered on average more meals per order than ever before, we pulled back on some of our marketing investments given the softer consumer environment, elevated travel levels and anticipated improvements of our unit economics into the second half of the year. We plan to shift a part of these budgets to H2, when we will have debottlenecked Factor U.S. capacity and can drive more profitable growth as a result. In terms of average order rates, we increased that by yet another 2% year-over-year to 4.1 orders per quarter per customer. That's a new record level for HelloFresh in the second quarter and more than 14% higher than the last pre-pandemic level that we had. The major drivers for this improvement are the enhancement of our product and recipe quality, better service levels and a significant strengthening of the relative affordability against grocery and food delivery, which have been exposing the customers to a lot more inflation than we have, in the process gaining relative affordability. With that, I'd like to come to the average order value we have observed during the second quarter. AOV has been trending 8.4% higher than last year and has reached EUR 63.6 per order. This was the single biggest driver to our year-over-year positive net revenue growth. And if you look at our 2 segments, AOV increased actually 9.7% year-over-year in North America and about 6.5% in our international markets. Three factors contributed to that growth in average order value. Number one, a higher contribution of RTE, specifically impacting the North America number; price increases; and then very importantly, also bigger baskets by our customers on the one hand side with a larger menu. They've taken on more meals per order on average. And with the rollout of HelloFresh Markets into the U.K., into France and into Germany, we've also had a lot more customers exposed to our HelloFresh market, and that contributes positively to increasing AOV. The last 2 should really continue to be growth contributors going forward as we roll out HelloFresh market and scale RTE. Even as inflation is rolling off, this will contribute to better AOVs going forward. Now taken together, a reduction in the number of meals sent with higher average order values led to a constant currency revenue growth of about 1% for Q2 to EUR 1.92 billion. Please note that the euro lost against most other currencies, so euro-denominated figures are slightly down, whereas in constant currency, they're actually up. Q2 should have been the low point for growth with re-acceleration of customers and number of meals expected for H2. Outside of easier comps, we see the scaling potential of Factor U.S. into H2 as very significant, and we see a number of product enhancements hitting in the second half of the year such as the expansion from 35 to 45 meals on our U.S. menu, as well as the rollout of HelloFresh Market into more and more geographies. Overall, much improved unit economics and an improved customer experience should make our growth in H2 more profitable, which is why we have shifted some of our budgets into these periods. With that, as always, I hand over to Christian to walk you through our cost line items and our free cash flow generation.

Thanks, Dominik. And I would like to start with the development of our procurement expenses. Despite an overall still inflationary ingredient pricing environment, we achieved a year-on-year margin improvement of 0.6 percentage points by lowering our procurement expenses to 33.8%. Structurally, as you've seen consistently from us in the past, our AI-driven menu planning helps us to achieve consistently higher customer satisfaction scores and recipe ratings, while also hitting consistently our margin targets. In Q2, specifically from a geographic perspective, our U.S. related brands contributed meaningfully to this margin expansion as well as certain key international markets such as Germany and the U.K. Looking into the second half, you should expect a modest year-on-year increase of our relative procurement expenses as we, number one, ramp up our new Factor ready-to-eat production facility in Arizona; and secondly, have a strong pipeline of new products and experiments coming through, as Dominik had alluded to. Okay. Next, I would like to discuss the development of our fulfilment expenses. Similar to Q1, we have very meaningfully decreased our fulfilment expenses year-on-year by 2.3 percentage points. This is a continuation of the strong improvements that you've seen from us very consistently since mid-last year. Especially our North America segment continues to contribute significantly to this positive trend. As we had discussed in detail at our Capital Markets Day at the beginning of the year, we are meaningfully reducing our relative fulfilment expenses by, number one, optimizing our fulfilment center footprint; secondly, by driving process standardization; and thirdly, by ramping up the use of technology and automation. Besides these like-for-like ongoing improvements, a higher share of ready-to-eat, and a higher overall average order value also helped to deliver lower relative fulfilment expenses. The combination of both, a relative improvement on procurement expenses and a meaningful increase in fulfilment efficiencies means we've expanded our contribution margin by almost 3 percentage points to 28.4%. Now this is the fourth quarter in a row that we consistently deliver meaningful contribution margin expansion. Both of our operating segments contributed well to this positive trend. Especially our North America segment achieved a contribution margin of 31% in the quarter. We had promised at our Capital Markets Day that we would expand our contribution margin for the full year this year by at least 100 basis points. So far, we've delivered meaningful amount of that in each of the first 2 quarters and also expect for the second half to at least go 100 basis points above last year's level. Now I would like to discuss the development of our marketing expenses in Q2. We have spent somewhat less on marketing in Q2 than originally planned based on the factors that Dominik had outlined. This meant that both absolute and relative market expenses in Q2 2023 were largely on par with the same period last year. In a reasonably soft consumer environment, we decided, based on our AI-driven proprietary marketing tools, to stay disciplined in the way we're deploying our capital and rather deferred some budget to the back-to-school period in autumn. This period will then also coincide with the ramp-up of our new Factor facility in Goodyear, Arizona, which will go live towards the end of Q3. Now when you put all of this together, this means we have achieved the highest ever quarterly AEBITDA in Q2. We achieved an AEBITDA of EUR 190 million, higher than during any pre-COVID period. We achieved this through strong contribution margin expansion, disciplined marketing spend and very healthy retention and ordering behavior from existing customers. As a result, we delivered an AEBITDA margin of 10%. In that sense, our Q2 profitability is already a template of how we see our 2025 full year margin target, a contribution margin of around 29%, marketing at circa 16% of revenue and AEBITDA margin of circa 10%, all in line with what we had discussed at our Capital Markets Day a couple of months ago. Our strong Q2 AEBITDA margin performance also means that we are up for the full year -- for the full H1 versus the same period last year. This hopefully also provides some comfort to those of you who feared at the beginning of the year that our AEBITDA performance would be too back-end weighted and therefore put our guidance at risk. Before we come to an end, I would like to also discuss the development of our free cash flows in Q2 and the first half. On our Capital Markets Day at the beginning of the year, we promised to get back to at least free cash flow breakeven this year after quite extensive multi-year CapEx program. In H1, we have increased our cash flow from operating activities to EUR 207 million versus CapEx of EUR 169 million. This means we, already in H1, delivered a positive free cash flow of EUR 38 million. Dominik had mentioned earlier today already the long-term growth of our free cash flow per diluted share is, from our perspective, one of the most important drivers of value creation for our shareholders. Therefore, we will continue to be focused to drive the nominator of this ratio, i.e., free cash flow growth over longer periods of time, but also continue to be disciplined to avoid the growth of the denominator. We've also started to report free cash flow per diluted share as a key KPI. Some of you will have noticed that this morning already at the front of our quarterly report. We report this in addition to report our absolute free cash flow, so that you can easily track our progress on this metric. Our strong business profile and our financial position has also been recognized through the investment-grade BBB- rating, which we recently received from S&P. This is a good illustration of our business and puts us several notches ahead of most other international e-commerce companies. Let me now conclude with our narrowed outlook for the full year 2023, which is effectively repeating what we had published earlier on July 19 already. We have narrowed constant currency revenue growth from previously 2% to 10% to now 2% to 8%, Illustratively, this would, like at the midpoint of this range, i.e., at a 5% constant-currency growth rate in a full year revenue of circa EUR 7.7 billion, assuming FX rates as of mid-July, the time that we narrowed this guidance, which would mainly include a U.S. dollar to euro rate of around about 1.10. So roughly that is still today. Versus H1, we're expecting a year-on-year re-acceleration of revenue growth from autumn onwards as our Factor U.S. is not anymore capacity constraint from end Q3 onwards and COVID comparables will have largely washed out by Q3, Q4 2023. From an AEBITDA perspective, given the strong Q2 performance, we have lifted the lower end of our previous range, and therefore, currently expect EUR 470 million to EUR 540 million of AEBITDA for the full year. For Q3, just keep our normal seasonality in mind, i.e., summer contribution margin due to less fixed cost utilization during the summer holiday period and increased packaging including material costs due to peak temperatures in most of our markets. And then secondly, seasonally higher marketing spend in the back-to-school period, where we, in addition, have carried over some extra budget from Q2 to take advantage of attractive opportunities when they arise as discussed earlier. So with that, we look forward to your questions.

[Operator Instructions] And the first question comes from Luke Holbrook, Morgan Stanley.

Just a question really on if you can share some more color on actives meal-kit falling in North America. And is this do you think due to increased competition? Is there a demographic that's churning? Just any more color there would be very helpful.

Look, it's Christian here. So on the first subpoint, so no, it's not increased competition when you look at whichever third-party data you have access to. Market share data based on credit cards, for example, you will see that we continuously increase our market share across our meal-kit brands in the U.S. and certainly also on the ready-to-eat side, and this applies to both the second quarter, but frankly, any period you want to look at over the last 5 years in that market. In terms of the year-on-year development, this is driven by two things: one, reasonably soft consumer environment in North America that you probably have heard from other companies in the period as well, and the fact that's been effectively since the first half of Q1 [indiscernible] in our ready-to-eat business, and a letter as discussed, will be addressed as of the end of Q3. So we debottleneck capacity constraints there. And on the first one, we have good hope it's going to clear up over time as well.

Okay. Understood. And just on the capacity in North America, your orders are down, I guess, 8-odd percent. Is there a way that you can optimize warehouse capacity even further or change some of the distribution footprint going forward?

Yes, that's an ongoing process, but overall we feel quite good with the steps that we've taken. You see that shining through in our contribution margin, obviously, as well. So a rationalization of our fulfilment center footprint and optimizing that is certainly one of the factors that helps to expand contribution margin.

The next question comes from Andrew Gwynn, BNP Paribas Exane.

Just apologies [indiscernible] very short term, but Q3 trading sort of guidance would be very useful, presumed the significant seasonality even more pronounced than last year. So appreciate an improvement from September onwards, but as we see in July and August, presumably trends are pretty subdued.

Yes. So obviously, reasonably early in that quarter. And keep in mind, this led, I would say, in the back half of peak holiday season for us. So there's not a lot we can tell you about Q3 trading other than that it's fully in line with our plan on the basis of which we've given our guidance.

And Dominik said earlier that you expected growth trough for year-on-year growth dropped in Q2, so Q3 presumably expected to be better and then much better in Q4. Is that the right sort of shape?

That's part of the right shape. So sequentially, a modest move up in Q3 and then more pronounced in Q4. Correct.

The next question comes from Joseph Barnet-Lamb, Credit Suisse.

When you talk about shifting budgets into 2H, they will be more profitable? I imagine you mean from a sort of CAC versus LTV perspective. In the remarks, you sort of gave some reasons to believe that LTV would be better, but could we talk a little bit about CAC. I think CAC was sort of rising through last year and then I think you said at 1Q that it had been sort of flat from 4Q into 1Q. Has CAC remained flat in Q2? Or have you seen a bit of movement upwards? And what are your thoughts on CAC into 2H?

Yes, sure. What we did see is, as the pandemic ended sort of like in late '21, or early 2022, we saw some sort of like slightly increased customer acquisition costs, but it's really been broadly flat to slightly down since. So we haven't seen sort of like additional inflation in customer acquisition costs. And as we outlined during the Capital Markets Day, at the same time, we've actually grown our LTV more. So our LTV to CAC these days is at the same or better levels for most of the markets that we operate in. There are always some regional differences, but high level and company-wide sort of like we have increased LTV more than CAC has increased since the pandemic ended.

So there wasn't a sort of movement up in CAC in Q2, which is sort of one of the drivers for you pushing the spending into H2.

In Q2 '22, there was a move up, and ever since, we've kept it broadly stable. Used Q2 '23 this year to really work on our contribution margin, to work on our product enhancement to make sure that we get the capacity debottlenecked in Factor, so that we can drive profitable growth now in the back-to-school season and all the way through Q4.

And I mean Q2 '23 versus Q1 '23, there have been no incremental increase. It sounds like you're saying there has not been an increase.

Correct.

Next question comes from Emily Johnson, Barclays.

Can you please walk us through what your expectations are for the market and as well your kind of meal-kit versus ready-to-eat mix to get to the bottom and the top end of your revenue growth guidance. So for example, if Factor grows as planned in H2, what would need to happen to the rest of the business for you to only achieve the 2% revenue growth given easing comps? And a follow-on from that. In terms of Factor growth in the second half, what gives you confidence in not just when the capacity comes through, but I guess the consumer subscribing to it given the weakness you've seen in Q2? And to what extent do you think you benefited in the second half last year, in the first half this year from the closure of Freshly?

If I can to answer that. On the first one, as you know, we're not giving granular guidance on a per-brand basis. If we change that, I'll definitely make sure you will know that, but we're not giving that. Qualitatively what makes us confident that we can further step up growth at Factor once we've got the production capacity is really the latent demand that we are seeing. So right now we have to be reasonably -- our marketing teams have to be reasonably constrained in terms of the campaigns that they run not to generate more demand than what we can serve. And that it's an ongoing fight on a week-by-week basis, so to pair back there. So we think we're quite confident that once capacity is debottlenecked that there will be quite healthy demand for that.

The next question comes from Nizla Naizer, Deutsche Bank.

Just two questions from my end. Firstly, you mentioned there were some marketing from Q2 now being pushed back to sort of Q3 to Q4. Just on the back of that, how should we think of the customer base evolving in Q3? Could it be sort of a typical seasonality quarter where there could be sequential declines? Or could it even be flat with the incremental marketing that you're now spending after the declines we saw in Q2? So some color there would be great on the base case of the customer base evolution. And my second question is on your 2025 outlook. To get to the EUR 10 billion of revenue, you would now need sort of double-digit growth from 2024 to 2025. How confident are you that growth could accelerate from these levels? And if Factor is the reason, would love to get some color on the scale of that growth that you anticipate to get to those targets.

On the first point on customer growth. So if you assume for Q3, broadly stable customers, but again, there's some potential variance left to right from that, especially given when you think about Q3, where let's say customer acquisition is somewhat back-end loaded. And we're only going to embark on back-to-school in most of our key geographies September onwards. So even people we bring on board that may not have received first delivery still in that quarter and therefore would not count as an active customer. So there is some variance in that. But sequentially, versus the 7.3 million in Q2, if you assume, broadly stable with a little bit inflow variance left to right. On your second question, so confidence on our mid-term growth to sit north of 10%. We remain confident that the drivers are unchanged from what we discussed in detail at our Capital Markets Day at the beginning of the year.

Next question comes from Nick Coulter, Citi.

Nick Coulter from Citi. I have three quick ones, if I may, please. Firstly, for the demand segment, could you update on the underlying level of pricing going through, kind of the underlying price per meal increase year-over-year. I guess, by default, that will kind of give us the impact of RTE, marketplace and surcharges. Secondly, could you update on the customer number over that between Factor and the other brands in the NA segment, please. I know it's a small percentage, but it would be helpful to have an update, please. And then thirdly, just to clarify, I think, Christian, you mentioned a modest move up for the third quarter. Which income segment line were you referring to with that, please?

On the impact of pricing, so the price per meal of the 8.5% AOV increase that you've seen from us year-on-year, roughly 5% to 6% are both of that combined, so price and mix combined. And then 2%, 2.5% is basically further expansion of the take-up in surcharge as well as basically HelloFresh market. And I'm sorry, there was some noise. Would you like to remind us of your second and third questions?

Yes, sure. It was just on the customer number overlap between Factor and the other brands in them. I think you had given it previously as being a small percentage, but just to kind of getting a sense of how that's trending.

Yes. For Factor and North America, I couldn't tell you here spontaneously. What we've also shown in the report is basically for the group of ours. So if you take all brands together, that overlap is somewhere around 150-ish, 150 in key customers. So by deduction in the U.S., it's even smaller. So that the bottom line is de minimis, frankly.

And then the modest move up for the 3rd quarter that you mentioned earlier, which income statement line does that refer to, which statistic does that refer to, please?

So that was on our procurement expenses year-on-year, procurement expenses as percentage of revenue given that basically we will start in the second half, so from end September onwards to use that new capacity. And as you know, Factor comes with somewhat higher procurement expenses, and then there are a number of quite exciting product enhancements and experiments that we want to use basically in the second half, and that there's a certain impact as well. So the combination of both means year-on-year modest procurement expense on a relative basis expansion in the second half. Having said that, contribution margin overall, we are still targeting to increase also in the second half by north of 100 bps. So expanding margins in spite of that also in both Q3 and Q4.

I think that's helpful. I was referring, I think Dominik mentioned an inflection or growth bottoming in the second quarter. And I think Andrew asked you a question on clarifying that, and you said there would be a modest move up for the third quarter with respect to grade. So I was trying to understand. I think it's obviously some sort of sales line, which was declared.

I see. Sorry. Yes. So a modest sequential step-up in revenue growth. So versus the around about 1% year-on-year growth that you've seen from us in the second quarter and more pronounced step-up in Q4.

The next question comes from William Woods, Bernstein.

Just on active customers in terms of the kind of 9% drop. Are you able to give us a rough breakdown between losing existing customers and the newer customers or any kind of guidance there? And how does that impact your AOV? Are you seeing the mix of customer types to help your AOV?

William, it's Christian. So as you know from the shape of our retention pattern, typically, we see very little churn basically from customers the more and the longer they are with our service on, therefore, any reduction in customers would then more be weighted towards more recently acquired customers.

I suppose that helps your AOV rate because you shift to a full price-paying existing customer versus a newer maybe discounted customer. Is that a factor in your AOV move?

This is overall beneficial to our average order value. So, correct.

The next question comes from Muskaan Kedia, Goldman Sachs.

I think the first question I have is just in terms of how you think about marketing versus customer acquisitions. Clearly, in the second quarter, you initially guided to 7.7 million, and you ended up a bit lower than that. And historically, you've been quite good at predicting the number of new customer additions based on the marketing spend that you were planning. So just wondering, has anything changed in terms of the visibility? And I'm just wondering like what basically happened for you not to be able to achieve the guidance that you initially gave? And obviously, I think that's important given, obviously, that will give us maybe some more confidence in terms of the second half and the longer term guide. That's the first question. And secondly is just on the capital allocation. You obviously have [ EUR 340 million ] of net cash. So just wondering, I mean, obviously, given the share price is attractive, in terms of how you're thinking about the buyback and the potential timing of that?

Yes, it's Christian. So to your first question, I would really repeat what Dominik had mentioned earlier. We decided that in a reasonably soft consumer environment, it would be more beneficial for us to give first half of that spend into the back-to-school period in autumn other than spend relatively aggressively ahead of -- or into the summer period. Really, that was the driver of the near term active customer development. And then on your second point, that's noted. So in case we take a decision on capital allocation, for example, to something like a share buyback, we would communicate that at that point in time.

And then the last question comes from Sebastian Patulea, Jefferies.

May I please ask what makes you confident that after the Arizona facility gets launched at the end of Q3, that demand is there? Can it be the case that you launch it and grow for 2025, it's not accelerating. What are you seeing that gives you confidence that demand is there, please? Maybe you're canceling some orders or you cannot fulfill some order? You tell me, please.

So what makes us long-term confident that in RTE, but as well in meal-kits, we're early days in the growth trajectory, is the incredibly low penetration number that we have today. So obviously, if I talk about meal-kits here first, when you triple a business in 3 years, it's very, very hard to just continue kind of like going each and every year and each and every quarter. We will be growing each and every year. We will be returning to double-digit growth in the near future. The timing of some of that growth is not always entirely in our control. That's for the meal-kit business. For Factor, specifically, we're at even lower penetration than we are in the meal-kit business. And if you just look at the category that has been established in the U.S., that's about 10 to 15 billion of ready meals actually sent in retail. We do believe that our product is much, much higher quality than what you can find there. So we're at very low penetration levels at the moment. And even if we double from the current run rate, we're still at very low penetration levels. What we did see since the beginning of the year is that even running at sort of like half of the marketing budget than we actually wanted to ideally run on, we had to pull back in a lot of weeks, and actually some of the COVID playbooks that we have developed in switching off certain channels, in introducing like a third shift in onboarding 3PLs to basically manage some of that demand, there's a lot of anecdotes around here that make us quite confident that we will be able to capture significant demand. But once again, I think the long-term opportunity is incredibly intact. There's very few other categories which, in a short span of a decade, have actually scaled to around EUR 8 billion in revenue run rate, shipping 1 billion in meals, and that not every single quarter is always up and to the right as we manage through multiple, multiple crises at the same time. I think that's pretty clear. But midterm, I think there's no way around that this business will be a lot bigger in 2 years and 3 years and then 10 years than what it is today.

Dominik, if I may ask a second question, please. Are there any countries in which customers started to sign up to HelloFresh due to the affordability factor? The reason why I'm asking this is because in the group's history, there were a few times when HelloFresh decreased prices and growth has meaningfully accelerated. So were there any countries in which the specific factor why people signed up was because it was becoming more affordable?

So I'm not sure if I 100% understood your question. If it is around pricing, then I think generally, like our philosophy is that we want to increase prices less than overall inflation and strengthen our relative affordability against grocery and food delivery. We think we can do that because we have more levers to mitigate price increases that we see in the market than those companies have because we're fully vertically integrated. That's why both in terms of in times of inflation, also in terms of minor inflation, we should always be able to strengthen our relative affordability as we gain scale and as we move through the powerful flywheel of giving back sort of like excess margin to consumers to enlarge our overall target market.

I was asking more if customers became aware, or if they are aware that you guys are more affordable than you were 2 years ago, for example, from that perspective.

So from some of the surveys that we actually take, we have seen that there is a modest increase in customers who feel that HelloFresh is actually like a great affordable alternative. I think some of those numbers that we pull on a quarterly basis, customers all around the world. So at least we have seen that despite the fact that we've increased prices on an absolute level, we have not seen that customers actually think we're more expensive than grocery or more expensive than food delivery. The relative affordability, I think we have proof points that customers understand that they continue to find better and better deals at HelloFresh.

So there are no further questions. At this point, this concludes the Q&A session. Thank you all for participating, and I'd like to hand it back to the speakers for some closing remarks.

Thank you for attending our Q2 earnings call. I think overall, I see a big focus on some small margin movements or active customer numbers here and there. I do think the long-term opportunity is more than intact. You will see us kind of like reaccelerating growth in Q3 already. And I do think there's many, many growth opportunities and many, many growth vectors where we've already laid the foundations for within the group, plus we will be maintaining sustainable free cash flow generation for the next years to come. So overall, I think the risk is very much skewed to the upward. And we're obviously hoping to prove that out over the next quarters to come to take advantage of the massive long-term opportunity that we're going after. Thanks for your attention, and I'll speak to you all soon.